Front-Running Chart Patterns Strategy (Video)
The Front-Running Chart Patterns strategy increases reward potential and reduces the size of the stop loss required to trade chart patterns during a trend (compared to the traditional chart pattern method). Use it with triangles, small ranges, and rounded bottoms that occur within a trend. Applicable to stocks, forex, and futures, on all time frames.
A chart pattern is a geometric shape formed by the price movements of an asset. Chart patterns include rounded bottoms, double/triple tops and bottoms, triangles, head and shoulders, wedges, flags/pennants, cup and handle, and ranges. The traditional way to trade these types of patterns is to wait for a breakout of the pattern. There is nothing wrong with that approach, but I prefer the front-running approach. I get a better entry price which means my stop loss is smaller and my reward potential bigger. The video below shows how this is accomplished.
For analysis purposes, it is worth studying all the chart patterns (covered in my Forex Strategies Guide), but for the front-running strategy I focus mostly on triangles, small ranges, and head and shoulders continuation patterns.
For this strategy, isolate those chart patterns then short-sell near the top of the chart pattern if the trend is strongly down. Or, buy near the bottom of the chart pattern if the trend is strongly up prior to the chart pattern. It’s called front-running because we’re anticipating the next likely direction, based on the trend, which gets us into the trade with lower risk and greater profit potential than the traditional breakout approach.
While the video shows stock market examples using daily charts, this strategy can be used in forex or futures as well, on any time frame. I use it frequently when day trading forex or day trading stocks.
Position sizing is also important. To see how to get the proper position size, read Determining Proper Position Size.
This video was made back in 2015. As of 2018, I no longer publish the swing trading signals VantagePointTrading, or at least not regularly. I prefer people learn how to trade for themselves instead of relying on me for signals. That way they can trade a consolidation breakout right when it happens. Every month or two I do provide examples of recent trades for educational purposes.
A few additional notes on this strategy:
–In the video, I show an example of a trend channel as well. That is just another chart pattern. If there is upward trend channel, I don’t usually expect the price to break out of the top of it, but I will try to buy near the bottom and exit near the top. Consolidation breakout entry near the bottom of the pattern still applies, and the top of the channel should be far enough to offer a good reward:risk on the trade. If the reward:risk is low, avoid the trade…same with any trade.
–Use the history of the stock to help assess how far above/below the consolidation the stop loss should go. If it is a volatile stock, put the stop loss a bit further out. Look at prior consolidations and see how far the price moved out of the consolidation before making a trending move. Those wiggles out of the consolidation tell you how far your stop loss should be outside the current consolidation.
–I typically only trade the front-running strategy in very strong or weak assets. In forex and futures markets, we can flip through the various charts because there aren’t a lot to go through. For stocks, there are thousands, so I typically use a screener like Finviz, and I just sort all stocks by performance over the last 1 year or 6 months. I then rank them strongest to weakest. I am looking for front-running trade setups in the strongest ranked stocks (potential long trades), or the weakest ranked stocks (potential short trades). Just because a stock is strong or weak doesn’t mean we automatically trade it. All the conditions of the strategy much still be met, and the stock must be in a strong uptrend when the chart pattern forms for us to consider going long (assuming it gives us an entry signal). Same goes for taking a short position.
For more on this strategy, see Predict Chart Pattern Breakout Direction For Lower Risk Trades
This strategy takes time to learn and effectively implement. To trade this strategy, isolate trends and chart patterns. Also, watch for consolidations–only near the top of chart patterns for short sales or near the bottom of chart patterns for longs–and then establish a reasonable profit target.
Not every chart pattern is worth front-running; determining which ones to trade will take practice. The stronger the trend (up or down), the better I feel about front-running.
Some chart patterns won’t give us an opportunity to use this strategy, as they will breakout before giving us the opportunity to front-run. Therefore, decide whether you will only front-run, or if you will trade chart patterns in the traditional way as well.
Practice in a demo account and establish a profitable track record before trading this front-running strategy with real money.
Cory Mitchell, CMT
If you are interested in learning a complete method of swing trading stocks, including how to find trades, how to manage risk, where to enter, and where to exit, then check out my Stock Market Swing Trading Video Course. More than 12 hours of video show you how to swing trade efficiently and profitably, in about 20 minutes per day.